Listen to my podcast on the subject of iBuyers
The growing number and types of threats to limit the inventory and sales by residential real estate agents include, but are not limited to, (a) iBuyers (ie, “instant” cash buyers / investors who are well financed) scooping up thousands of homes before they hit the normal buyer market and either renting (estimated 1/3rd get rented) or selling them as flips; (b) people using Airbnb and other rental services to rent their properties for monthly income and not listing them for sale; (c) vast number of millennials with massive student loan debt, no desire to settle down, and lower paying salaries than they expected that can’t afford to buy the traditional “starter” homes ; (d) lack of adequate inventory of free market sales of the starter homes either prohibit people from listing their homes or turning to the iBuyers as the one option of unloading their property and moving; and (e) many homeowners who have simply realized that if they sell their homes for an inflated price, they would just have to find another home for a higher price in today’s market.
This blog post is just addressing the iBuyers (including, but not limited to Knock, Offerpad, OpenDoor, Zillow, Open House, Realogy, etc) that can be backed by billions of $ from venture capitalists in the US, Chinese Government or other foreign investors.
Bottom line in brief: iBuyers (now a multi-billion $ industry from Chinese investors to US venture capitalists) will offer you cash often based on similar or lower/older comparable sales, then charge a 6-10% fee, require you to also pay the total realtor sales commissions (anywhere from 4-8% in general), deduct costs for repairs/updates “they” (not you) demand to be performed by their contractors; won’t disclose anything about the house whether they know it or not; and require you to sign a document at closing that makes the property an “as-is” sale without any recourse or warranties of workmanship on any work performed in the home. Also, iBuyers promote the benefit of “picking your own closing date”. Well, that happens in a normal real estate transaction too…just the Buyers and Sellers negotiate the date and normally within 30 days of the contract effective date. And what about the Buyer not following through with the purchase? Well, the iBuyers also don’t guarantee they will close if they find too many updates or repairs or choose to back out as well and WILL charge you fees for their estimates and reviews. With good real estate agents and both Buyer and Seller stating on top of the lender, it rarely happens that transactions fall through on financing late in the game. Normally, it’s quite evident up front early in the process.
The Good: (1) Sellers find it convenient and quick (but at a steeply discounted net price from real market price); (2) for Buyers of flipped iBuyer homes, at least they can find more affordable housing (at an elevated price) that has been updated (but Buyers aren’t aware of the quality of those updates and are buying higher than normal to cover iBuyer return on investment); (3) for those iBuyers who turn the homes sold into rentals (although at an inflated rental rate due to lack of affordable housing inventory), it offers the renting public (i.e., those younger buyers who have huge student debt and can’t afford the purchase) a way to live in a community (good schools) and avoid apartment living; and (4) it pays off big for the venture capitalists buying the homes to get a discount on the buying side and a premium on the renting or selling side (i.e., very one sided game here).
The Bad: Normal home buyers in the lower end of the housing prices are usually 1st time homebuyers. In addition to the counter comments above (quality of updates; elevated rental rates; and huge student debt; , (1) They don’t have the opportunity to compete with a cash buyer since many sellers want a quick sale (i.e., cash-is-king) and no hassles of showing at inconvenient times, repairing things they live with, problems disclosed to them and now must disclose to others if deal falls through, and seeing strangers in their home. (2) Even listed properties are under contract so quickly from cash offers before normal Buyers have a chance to see them online and visit them to choose the right home (i.e., not many people buy sight unseen unless they first visit the home). As for sellers (in addition to steep discounted net price and (1) they probably could sell the home on the market for more purchase price; (2) they wouldn’t have nearly the number and types of repairs or upgrades since home buyers need living spaces and are much more negotiable on conditions than investors; (3)
The ugly: Sellers get screwed (for a 12+% discount (iBuyer fee plus realtor sales commissions on both Buyer and Seller side plus all iBuyer “required” repairs/upgrades ) selling their homes well below a normal market price, the net price at closing is lower than could have happened under a real estate professional’s marketing and guidance; Buyers get screwed, since they don’t have enough good inventory to choose or opportunities to buy low and sell high like investors; Real Estate Agents, get screwed by not legitimately representing their clients by protecting the Seller to get higher net sales proceeds and disclosure of all information about the house to the Buyers. iBuyers win: They call the shots in the deal and they’ll continue to bombard homeowners with the convenient, no hassle way to sell until the sellers catch onto their game and demand higher net proceeds from them or uses the real estate professional to sell their homes.
There are these and other signals to the residential real estate market that change and of historical patterns are causing significant disruption to the traditional buying, selling, and moving up marketplace and significant adaptation and marketing strategies are in the wind. Expect iBuying to continue in the near future because the money is there, investors want a return on it, and sellers sometimes like the easier and quicker way out and only to slap themselves on the forehead later when they realize they could have gotten more with less overall hassle…
Some recent articles on iBuyers:
Zillow Wants To Buy Your Home For Cash (And A Fee)… 3-5 years from now, they plan to be buying and selling 5,000 homes a month, which is around $20 billion/year in revenue.
Real Estate Right Now, what are iBuyer programs?
iBuyers are Here to Stay: How Tech has Adopted an Old Transaction Model and is Making it Better
iBuyers: Is The Convenience Worth The Cost?
The iBuyer Report (Preview)
Realogy expands iBuyer program, reveals cash backing for buyers
iBuyers are stealing equity from homeowners
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